Telecom Ramblings

Content delivery giant Akamai (NASDAQ:AKAM - chart, news, filings) reports earnings after the bell today, so let’s take a look at where things stand.  Or at least, where we think they stand given the uncertain environment. The economic crisis is perhaps a bit less scary now than back in October when the financial world was imploding, but that is only because our eyes are now accustomed to the dark – it hasn’t gotten any lighter yet. But for someone like Akamai that has little debt, generates gobs of cash, and operates in a sector that is still growing despite the economy – it’s almost business as usual. They may be under siege by smaller but aggressive competitors, but that’s just business.

The company had a reasonable third quarter, especially considering the state of the economy. Margins fell slightly, but given the increasing competitive field and the worsening economy that wasn’t surprising. The company remains with huge 70%+ gross margins, giving them a big cushion if things take a turn for the worse. For the fourth quarter, here is what I expect to see (keeping the economy in mind of course):

During the fourth quarter, the CDN space saw a reasonably stable pricing environment despite a very crowded field. But there were indications that Akamai itself became a bit more aggressive on a case by case basis in winning and keeping deals, and Limelight Networks (NASDAQ:LLNW - chart, news, filings) proved to be a quite resilient foe throughout 2008. The company did announce layoffs in the quarter, but the savings will probably only show up in 2009. Hence, some margin deterioration should be expected. Revenue growth should not be spectacular, but the CDN pie should grow and Akamai’s slice should grow with it. The combination of modest revenue growth and slight margin deterioration mean EPS will probably not go anywhere.

As for 2009 guidance, I expect they will give conservative numbers with wide ranges. Anything else would be crazy.